Almost every time you click on the “terms and conditions” tab on a website, you’ll see language like this:
Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by binding arbitration administered by the American Arbitration Association. Judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.
Mandatory (otherwise called “forced”) arbitration is a proven technique used by businesses to reduce their exposure to lawsuits. I advise clients who are business owners to insert mandatory arbitration clauses in their customer contracts.
But there’s a limit to my tolerance for mandatory arbitration. That’s why I was sorry to see Congress overturn a Consumer Financial Protection Bureau (CFPB) regulation that banned mandatory arbitration provisions for many financial institutions, such as banks and credit bureaus.
Since I’ve been sued twice, I have a personal distaste of lawsuits. Both cases were frivolous. And I spent more than $50,000 in all defending myself.
But if you’ve been injured or financially damaged, and can’t get recourse any other way, a lawsuit may be your only option.
The intent of the CFPB proposal was to help consumers who had been injured by wrongdoing at financial giants like Equifax and Wells Fargo. In May, Equifax had virtually its entire database of consumer credit reports stolen by hackers. The attack occurred because Equifax failed to patch a software vulnerability it had known about months before the breach occurred. Meanwhile, Wells Fargo employees opened more than 1.5 million “ghost accounts” its customers never authorized, generating millions of dollars in fees.
Consumers can still sue banks and credit bureaus as individuals. But they’re barred from banding together to file class-action lawsuits against these financial institutions.
Litigation makes sense if you have a good case. A friend of mine got Equifax to pay him $15,000 after the company failed to update his credit report after repeated efforts to correct it.
Small claims courts hear cases with limits ranging from around $2,500 to $10,000. More than that and you’ll need to pursue your case in civil court.
But frankly, most people don’t bother suing, no matter how good a case they have. And in practice, it’s hard to recover damages unless you can prove you experienced a financial loss.
I won’t sue Equifax for handing over to hackers the data it has collected about me for decades, without my consent. To the best of my knowledge, my identity hasn’t been stolen. It probably won’t be, because, against Equifax’s advice, I put a security freeze on my credit file.
Thus, I can’t prove that Equifax actually damaged me financially through its depraved indifference to data security.
But since I’m one of the more than 140 million consumers who had their credit data stolen from Equifax’s servers, I’m part of the class of consumers that will recover in the class action lawsuits being filed against it. Jay Adelson, a leading class-action attorney, believes Equifax could eventually be forced to cough up $1 billion. After the lawyers take their cut, I might get a check for a few dollars.
But that’s not the point. A few people suing Equifax isn’t going to make them change their business model. Losing the occasional lawsuit is just another cost to write off against profits. Writing a $1 billion check will focus their attention.
However, the next time hackers breach the company’s security defenses (which incredibly, happened again in October), mandatory arbitration will apply, unless the company’s waives it.
Proponents of the congressional ban on class-action lawsuits against the financial industry argue that without it, the cost of financial services would rise. But after the 2007-2008 financial crisis, Bank of America, JPMorgan Chase, Capital One, and HSBC all eliminated their mandatory arbitration clauses. Fees didn’t increase then, and mortgage rates didn’t rise after Congress banned mandatory arbitration in the mortgage market.
Of course, I’d prefer a free-market solution to these abuses, one without the need for litigation, regulation, or new laws.
The real solution to predatory banking practices is to accelerate the transition to cryptocurrencies and peer-to-peer lending. The fractional reserve model that banks have used for centuries is obsolete. I won’t mourn its passing.
A solution also exists for the problem of credit bureaus assembling and selling your data without your consent. It is to recognize that everyone has an ownership right to their own data, including data held by third parties. Ownership over your own data gives you the right, but not the obligation, to share it with others.
Your data has value. If you owned it, you'd receive a tiny royalty every time someone accessed it. You could also restrict your data flow, if you chose. The blockchain technology that underpins cryptocurrencies could pave the way for secure markets for personal data, making credit bureaus obsolete and putting you in control of your data.
Until peer-to-peer lending and the blockchain put banks and credit bureaus out of business, we need every tool available to rein in the abuses that financial giants commit. And that includes class-action lawsuits.
